Friday Interview: Rebutting Minimum Wage Myths | Eastern North Carolina Now

    Publisher's note: This article was written by the staff of the Carolina Journal, John Hood Publisher.

JLF's Cordato says wage mandate hurts low-skilled workers

Roy Cordato
    RALEIGH - "We must raise the minimum wage." That is one mantra emanating from progressives across the country and here in North Carolina. Progressive support for a mandated minimum wage is nothing new, nor are the likely negative impacts on the low-skilled workers the higher wage is supposed to be help. Dr. Roy Cordato, John Locke Foundation Vice President for Research and Resident Scholar, discussed the economics of the minimum wage with Donna Martinez for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)

    Martinez: The typical argument in the discussion over a minimum wage, from supporters, is this: We need to help people who are toiling away at low-paying jobs. And businesses can afford this. It's not much to them, but it means a whole lot to the person who isn't making much money. What's wrong with that?

    Cordato: Well, a number of things. First of all, I do agree we need to do something for people with very low skills so they can earn higher wages, which is to see that they have higher skills. You cannot mandate that someone just be paid more. No one is going to hire anyone for an amount that's greater than their productive output is worth. Ever.

    And so what we want to do is find ways to make people more productive, make their output more valuable. And that's going to come through reforming education and allowing them to get training that they need, and that sort of thing. The idea that, well, businesses can afford it? That's really not the point; it's not charity. They can probably also afford to give more money to the Cancer Society, OK? The point is that you cannot force a business to hire someone whose value is less than what you have to pay them - or more specifically, less than what it costs you to hire them, which [are] two different things.

    Wage is not the full cost of hiring someone. That's the first cut, and that's what the minimum wage applies to, but it doesn't apply to other costs of hiring someone. So unless a person can produce more than that, whatever the full cost is - and I calculate it to be about, for someone earning a minimum wage of over $10 an hour, it's going to be over $13 an hour - that person would have to be very productive.

    Martinez: Let's talk about those additional costs. Tell us what they are, because when we hear someone say, "Well, we should be paying at least $10 an hour," a lot of people think, "Well, that's $10 an hour." What is it really?

    Cordato: At a minimum wage of $10.30 an hour - which is what President Obama is calling for, a 40 percent increase over current minimum wage - the employer would also have to pay Social Security of 7.6 percent - Social Security and Medicare on top of that, unemployment insurance on top of that. And then if you are an employer with 50 or more people, for anyone working over 30 hours a week, which is the new full-time under Obamacare, you have to provide them with health insurance.

    So you are looking at ... incurring a cost of about $13.50 an hour to hire them at the minimum wage. Well, what that means is that someone who comes to your door looking for a job will have to be able to produce more than $13.50 an hour worth of output, in order for you to hire them, because your other choice isn't to hire them for something less than that.

    Say they're worth $8 an hour or $9 an hour. Your choice is hire them at that minimum or don't hire them at all. It's not like the employers don't have a choice. You think just because we raise the minimum wage, well, they have to pay people more. Well, only if you hire them. Right? If you don't hire them, you don't have to pay them anything. And you're not going to hire anyone who doesn't generate a positive return for the business.

    Martinez: So your point is that the very people that the mandated minimum wage is purported to help, in some cases at least, are going to end up not being hired at all.

    Cordato: That's exactly correct. The people with the lowest skills at the bottom rung of the economic ladder are the ones who are going to have that bottom rung of that economic ladder completely cut off for them. And let's face it, people get a minimum [wage] job in the beginning of their career ... for, more than anything, for more than even the wage, to get the kind of skills they need to move up the economic ladder, and so they can be paid more in a few months, and even more in a year. So what [the minimum wage] does is it cuts that first rung of the economic ladder off for many low-skilled people ... minority teenagers, high school dropouts, the people who need that first job the most.

    Martinez: You mentioned something a moment ago that is key in your writing about this, because you say not only do all of the economic arguments we just discussed apply to what we're talking about here - a mandated minimum wage - but you say it's going to get worse in 2015 because of Obamacare.

    Cordato: That's exactly right. Well, as I said before, under Obamacare, there's going to be a whole new minimum cost of hiring someone. You know, we talk about the minimum wage, but what the business is concerned about is the minimum cost of hiring someone. And part of that now is going to have to be health insurance if you're employing someone for more than 30 hours a week, and you happen to be fortunate enough to have a company that has more than 50 employees. So that is a mandated minimum cost of hiring someone, ... and that's what actually determines whether a person that comes to you is going to get employed or not.

    Martinez: The economics of this is pretty clear. So why are there still many calls for raising the minimum wage?

    Cordato: First of all, I think the general population does not understand the economics, and they have probably better things to do than, you know, paw through economic textbooks. But I think there's a lot of people who are anxious to have high minimum wages, specifically in order to keep competition out of the market - certain unions who have to compete with lower-skilled people.

    For example, you can hire either some union painters ... to do a project, or you could hire maybe some college kids or high school kids who might be lower-skilled. You might have to hire more of them and so on. But this prices those people out of the market. The way that low-skilled people compete with higher-skilled people is on wage. They can't compete on their skills, but they can say, "Look, I know my skills aren't as high, but I will offer you a lower wage."

    And unions, historically, have supported higher minimum wages in order to price lower-skilled competition out of the market. We see that in the retail business. And I would argue the reason why Wal-Mart is very happy to have the minimum wage raised is a) they generally pay above it, and b) their competitors like Family Dollar and other companies like that, pay at the minimum wage.

    And what you would end up doing is raising the cost of your competitors. In that case, lower-skilled workers are probably competing with higher-skilled workers at which they hire and have to pay a higher wage.

    Martinez: Roy, I've been hearing this argument for years and years. Historically, has this always been the argument, the economic argument of progressives?

    Cordato: Certainly in recent years. Interestingly enough, if you go back far enough, there's been - the progressives were much more honest about the minimum wage and why they wanted it. You can find roots of the minimum wage in progressive support of eugenics - keeping the lower-skilled, the feeble-minded, out of the job market. And also in South Africa, [a] minimum wage was supported to keep blacks out of employment in the diamond mines. It was overtly racist and supported by all-white labor unions.
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